Many of the long-established rare diseases are chronic, debilitating, and life-threatening. Yet, because drugs that treat rare diseases face a small commercial market or are not patentable, they are not developed or brought to market. The Orphan Drug Act (ODA) was passed in 1983 to encourage R&D into drugs that treat rare diseases by providing incentives for R&D into rare disease drugs. Most significantly, it provides the sponsor of an orphan drug with marketing exclusivity and a tax credit on its clinical trials expenses. To date, there has been no formal study of the mechanisms through which the ODA benefits health and no formal study of the mechanisms through which the ODA affects firm investment decisions. This project aims to study these mechanisms. Using a novel data set that the candidate is collecting on clinical trials of pharmaceutical and biotechnology firms, he will estimate the impact of the ODA on clinical trials for rare disease drugs and on final marketed products. To quantify these separate mechanisms, he will distinguish between new drug development and marketing of existing products for orphan indications. R&D for new products leads to new drug innovations for patient consumption. Clinical trials for existing products benefit patients through information on new therapeutic uses, through tailoring dosages appropriate for the orphan population, and through expansion of insurance coverage for previously off-label drug use. The ODA's impact on each of these pathways will be separately estimated. Finally, the mechanism through which the incentives of the ODA affect firm investments will be studied. Stylized facts suggest that the incentives are not working through standard price and revenue mechanisms. Firm structure and financing constraints may be interacting with the incentives of the ODA. These interactions are important to understand, as the characteristics of a firm's capital structure will dictate the types of incentives best suited to promote rare disease drug development.